Originally Posted by
Valar Morghulis
I hate loose money. I usually cinch it up with a 10mm, but it seems a 8mm does these days.
But seriously. Well run businesses are successful, but sometimes they hit a natural barrier, and need some kind of significant capital infusion or other serious break to go to the next level.
That’s where SWA was in the 90s. They had just expanded beyond the Texas border states, and was running a great operation. The problem was that at the end of the 90s, so was everyone else, so they bumped into a barrier.
Then they got a huge break. Not only did they bet right on hedges, but they bet right in the most advantageous way possible. Like landing on 00. Then the rest of the industry went into the toilet in the way most advantageous way to SWA.
To be clear, the other carriers let themselves get into that position where the economy turned sour in just the wrong way to affect them most. But by hook or by crook, SWA greatly benefitted, but was smart enough to fully utilize the opportunity.
You may get a Christmas card from SWA management. GK may even sign it. Let's put things into context. The industry was never healthy. Even in the late 90's. Do you remember United Shuttle? How about Metro Jet? How about Continental Lite? Delta Express? All tried during "the boom". All were mature airlines. With mature costs. Operating margins were horrible. Profitable yes but not booming. SWA was way smaller and nimble. Forget the 2000's. After 9/11, 90% of the industry was bankrupt. 75% of the total seats flying were under bankruptcy protection. Yet airlines like SWA, Jetblue, Airtran expanded like crazy. Most did not hedge or small amounts(partly because they didn't have the cash like SWA). Back then, your typical customer wanted a low fare. Those low cost carriers could provide it and make money doing it. Hedging takes actual cash. It becomes an asset that has to be valued every quarter. Doesn't mean that they will spend the asset in that quarter. It's a paper profit. And most of the paper profit back when those hedges exploded in value, were never used because those contract's were locked in for specified time. Their were a few quarters when oil with the refinery cost was north of $150 buck a barrel, those hedges helped push profits on a GAAP basis but in no way did it cause SWA to explode in growth. The industry was in dire straits.
Hedges are not bets. It's insurance. Any industry that uses commodities, use it to manage cost's. Especially when it's third of your cost. Delta has a refinery to manage the crack spread. American doesn't even hedge at all. GK would tell you that he know's nothing about oil. But he would like to know what some of the airlines imput cost's are so they can price the fares accordingly. It helps with revenue management. That's all it does.